What Is Invested Capital?

Invested capital is the total amount of money a company has put toward long-term activities including buying fixed assets, investing in intangible assets, making capital improvements, or entering into long-term debt agreements. It is essentially a measure of how much a company has spent to acquire and maintain assets.

When a company invests money, it is less liquid and the company is putting that money at risk. In effect, the company is buying an asset that may give it a long-term return. It is the invested capital that finances these assets, and as such, it should be thought of as a form of permanent capital for the business. Invested capital can be reported on the company’s balance sheet or income statement.

From a financial perspective, the more money a company has invested, the higher its return on invested capital (ROIC). The ROIC measures how efficiently a company uses its capital and is calculated by dividing net operating profit by its total invested capital. It looks at how much profits are generated for each dollar of invested capital, thus reflecting the company’s ability to generate profits by investing its capital.

Examples of Invested Capital

One way to think of invested capital is the amount of money that a company has spent in developing its business. For example, if a company builds a new factory or invests in new equipment, the cost associated with these activities is considered to be part of its invested capital. Invested capital also includes the cash that the company may have received from issuing shares in the past and the company’s retained earnings.

Invested capital also includes the debt that a company has taken on. Companies that take on more debt will have higher levels of invested capital, as they are using debt to finance the acquisition of new assets. By taking on debt, companies can acquire assets more quickly, but they need to understand the risks associated with taking on too much debt.

Invested capital can be used to measure how efficiently a company is using its resources. Companies that are able to generate more profits out of each dollar of invested capital are more efficient and better managed. It is therefore important for investors and companies to have an understanding of their invested capital and how it is being used.